Owning real estate remains one of the most important paths to building long-term wealth in the United States today, second only to retirement accounts. At the same time, rising housing prices and the need to come up with large down payments create major barriers to home ownership for most Americans living on low to moderate incomes.
In response to these barriers, recent years have seen an increase in available options for building real estate equity through shared ownership. Moving beyond traditional real estate investment trusts (REITs), new community-oriented shared ownership programs focus on empowering community members to build wealth through partial stakes in local residential and commercial real estate. Portland’s Community Investment Trust or Nico in Los Angeles provide examples of these programs in practice for commercial and residential real estate, respectively.
Improving digital infrastructure for administering these programs and facilitating the purchase and sale of equity stakes may provide an opportunity to increase the growth and reach of these local wealth-building opportunities. This post explores tokenization as one form that this infrastructure might take.
Blockchain for Partial Ownership of Tangible Real Estate Assets
Commonwealth’s research into innovative wealth-building pathways for households living on low to moderate incomes has identified community equity investment as a potentially fruitful application for blockchain technology. Specifically, the development of real estate tokenization as a blockchain-based method of facilitating partial ownership of assets may present an opportunity for local shared ownership programs to get started and scale more easily.
Tokenization is the process through which exchangeable tokens on a blockchain are created which represent ownership shares of an underlying asset. Platforms for tokenizing real estate (and other assets) such as Digishares are already established and may be able to work with local programs to create more streamlined digital mechanisms for buying, selling, and exchanging partial stakes in local real estate. Unlike more speculative applications of blockchain in the form of cryptocurrencies, real estate tokenization provides digital representations of tangible assets with consistently appreciating real-world value to make them easier to divide up and trade.
Community ownership of real estate provides a mechanism for all community members, including both owners and renters, to build equity by owning a piece of their community and to contribute to community growth through investment dollars. These programs are generally designed to be accessible to those who are only able or willing to invest small amounts over time, in some cases under $100.
Regulatory Barriers Increase Administrative Complexity
At the same time, there are significant regulatory considerations that add complexity to the administration of these forms of community investment. Federal regulations place restrictions on the offering of investment contracts to non-accredited investors. Together with regulations that vary by locale, these rules currently mean that starting an organization that offers this kind of local investment to community members comes with significant legal and compliance costs.
These barriers can slow the implementation of these models at scale and prevent projects from getting off the ground. While regulations protecting small dollar investors from being taken advantage of are important, the growing interest in community ownership programs in recent years has created space for innovation in designing programs that maximize opportunities for safe community investment in ways that are compatible with existing regulations.
Blockchain tokenization does not replace the need for this regulatory compliance, but it can facilitate the operations and growth of programs that have set up this legal foundation. As one expert currently implementing a community equity program described it to us, you need to “have your legal and financial house in order first…tokenization is a layer that amplifies what you already have.”
Opportunity to Provide Broader Access to Community Ownership Programs
As community ownership programs continue to proliferate, technology that facilitates scale and access may provide an invaluable catalyst for further growth. Marketplaces for the exchange of community real estate ownership tokens could increase transaction speed and liquidity for equity owners while reducing program administration costs, making it more convenient to both buy in and cash out of these investments. Common infrastructure like this could be an improvement over each program developing its own platform or system for buying and selling equity stakes.
Commonwealth is committed to exploring, testing, and innovating on the most promising wealth-building opportunities for households living on low to moderate incomes in the United States. If you are an organization interested in working with us to learn more about how households living on low to moderate incomes perceive and use different community ownership opportunities and the degree to which digital systems like tokenization could improve this experience, please reach out to Charles de la Cruz at info@buildcommonwealth.org.